By TWD Invest

May 28, 2019 | News

May 2019 in Review

Economic Developments

Australia:

  • Last weekend saw a surprise win for the Liberal Party/ Coalition in the Australian Federal Election. The current tally is 77 seats for the Coalition, 65 for Labor and six Independents. Three seats remain in doubt. The Coalition will likely form a majority with 78 seats. The key policies of the Liberal Party which if implemented could have an effect on investors are as follows:
    • Policy to create 1.25 million jobs over the next five years, including 250,000 new jobs for young Australians.
    • Delivery of tax relief of up to $1,080 for single income families earning up to $126,000. o Providing $525 million for a skills package with 80,000 new apprenticeships in addition to education funding.
    • Establishment of 10 training hubs in regional areas to create connections between local industry and schools to improve outcomes for young Australians, and,
    • Provision of a $100 billion infrastructure plan.
  • Most importantly for investors will be the likely lack of change in regard to dividend imputation and negative gearing, which should continue to assist people in retirement, and property/housing investors.
  • On balance the win for the Coalition is likely to be a positive for the Australian stock market, due to continued support for fully franked dividend focused stocks.

Australian Market – expects June rate cut by RBA

  • The Reserve Bank of Australia (RBA) kept interest rates on hold at 1.5% in May for the 30th consecutive meeting. Markets are indicating an approximate 88% chance that the cash rate will be lowered in June to 1.25%. The recent release of Minutes from the 7 May RBA meeting increased the view that the RBA is leaning towards a cut in interest rates.
  • The next RBA meeting will take place on 4 June, with the odds of a rate cut increasing after the release of prior RBA Minutes, an April lift in the unemployment rate to 5.25% and poor wages figures. The NAB Jobs indicator recently recorded its weakest reading since early 2016.
  • The Australian dollar against the US dollar firmed slightly post- election, only to fade again to be currently trading at approximately $0.69 USD.
  • The Australian housing market is looking slightly improved with Auction clearance rates in Sydney and Melbourne picking up, albeit from low levels, and slight improvements in loan approvals. However, it is still too early to call the bottom in the housing market, though this could occur in the second half of 2019.
  • Preliminary estimates for April indicate that the Commodity index increased by 0.9% (on a monthly average basis) in Special Drawing Right [SDR] terms, after increasing by 0.8% in March. The non-rural and rural subindices increased in the month, while the base metals subindex was unchanged. In Australian dollar terms, the index was unchanged in April.
  • Over the past year, the Commodity index has increased by 14.4% in SDR terms, led by higher iron ore, LNG and, beef and veal prices. The index has increased by 18.2% in Australian dollar terms.

Bond Markets:

Australian bond Yields decline on rate cut expectations. Yields on three-year bonds are well under the RBA’s 1.5% cash rate at 1.21%, having recently hit all-time lows. Australia’s 10-year bond rate recently moved to a historic low yield of 1.63% on expectations the RBA may cut interest rates. With the election behind it there is little standing in the way of an RBA cut, though moves down at such low levels have limited impacts on the economy.

World Markets:

  • European Parliament elections taking place on 26 May will decide the course of the EU, either a return to nationalism or more EU integration. Britain remains deadlocked over the way forward on Brexit after Prime Minister Theresa May’s deal with Brussels was rejected three times by lawmakers. Britain was due to leave the EU almost two months ago, however it remains unclear how, or if Britain will leave. It is currently due to leave on 31 October 2019.
  • EU Economic growth in the first three months of 2019 came in at 0.5% and 0.4% for Germany. However, the EU’s executive wing recently released data projecting weakening growth over the year. The International Monetary Fund (IMF) has also forecast a slowdown in Europe amid a cooling of the global economy.
  • France is expected to be slightly improved, with projected growth of 1.3%, and Poland is likely to perform strongly with projected growth of 4.2%.
  • Trade negotiations between the US and China appeared to stall this month. The US said China reneged on commitments in a draft agreement, this lead to both sides lifting tariffs against each other. Key issues include intellectual property rules, Government subsidies, and enforcement mechanisms.
  • China has demanded that all tariffs be removed. President Donald Trump last week made an executive order banning communications technology from “foreign adversaries” in a move seen as targeting the Chinese company Huawei Technologies and others with alleged ties to the Chinese government. Google said it would suspend Huawei’s Android licence.
  • China’s trade surplus posted a miss in April, coming in at US$13.84 billion, lower than the US$35 billion economists had expected. US Dollar-denominated exports also missed expectations in April, falling 2.7% from a year ago, though April imports rose by 4% from a year ago. • Our view on US Chinese trade negotiations is that ultimately it is in the interests of both sides to reach a workable agreement. We will likely see a market pull back if trade negotiations are drawn out.
  • CNBC reported scheduling for the next round of negotiations is “in flux,” because neither side appears willing to agree to concessions. However, President Donald Trump said he plans to meet President Xi Jinping of China to talk trade at the Group of 20 summit in late June.
  • The next US Federal Open Market Committee meeting is scheduled for June 18-19. The Funds Rate is currently 2.5%. The Federal Open Market Committee last month indicated it would raise rates to 3.0% in 2019.
  • Federal Reserve Chairman Jerome Powell said the US central bank intends to further shrink its balance sheet, suggesting it is not yet done with tightening monetary policy. This comment helped to support the US dollar.
  • The US 10-year bond yield is 2.416%, yields remain pressured as trade tensions with China and diplomatic tensions between Iran and the US drive demand for US bonds and the FOMC remains very slightly hawkish on monetary policy tightening.

Market Movements

Australian Equities:

  • The ASX200 Index lifted 2.4% in April, rising above 6,300 points. Performance in the Consumer Staples sector led returns, moving up 7.4% for the month, with Information Technology also contributing, up 7.3%.
  • Consumer Discretionary has a positive month, up 5.0%, with retail sales holding up well despite pressures constraining household spending.
  • The Materials sector had a weaker month, down 2.1%, with lithium producers in particular weakening, due to short selling in the sector and a fall in the price of battery-grade lithium in China. ASX200

ASX200

 

Global Equities:

  • Broad global equities indices (MSCI ACWI and MSCI ex-Australia) delivered over 4% return in April.  The S&P500 moved up 3.93% in April, the one year return is 6.92%, the STOXX Europe 600 Index traded slightly weaker over the last month in calm markets, while the Shanghai stock index also traded slightly weaker.

Looking Ahead

  • We do not see significant reason to significantly alter balanced portfolios post the Federal Election, which turned out to be ‘business as usual’ on the investment side, more than any other outcome. We continue to see the strong yields available on the ASX as remaining attractive, and would likely see any market pullback on prolonged US China trade negotiations as a buying opportunity.
  • We expect a further cut in Australian interest rates, and anticipate the Australian property market to look firmer in late 2019. With other commentators, we foresee a slight slowing in the global economy and expect global and local stock markets as most likely to range trade.

Words by TWD

The information in this Blog is of a general nature. It does not take your specific needs or circumstances into consideration. You should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

Words by TWD Invest .